Experience, Information Asymmetry and Rational Forecast Deviation

Using a stylized construct where analysts wish to minimize their forecasting error, we model forecasted earnings when firm characteristics and prior forecasts are public information but analysts can gain private information by appeasing management via deviating from the consensus. Combining endogenously acquired private information with consensus beliefs, analysts determine the optimal forecast deviation. We analytically show and empirically verify that the degree of rational deviation is influenced by analysts' experience and the degree of information asymmetry about the firm's prospects. An analyst's rational deviation increases with information asymmetry, but is concavely related with experience, i.e., deviation increases with analyst experience but actually decreases when an analyst is a novice or highly seasoned.